Creating a Consolidated Audit Trail
SEC Open Meeting
July 11, 2012
Today’s securities markets are highly automated, with trading activity widely dispersed across many trading centers. Due to rapid technological advances, trades are now transacted in a matter of milliseconds if not faster.
Such dispersed, automated trading activity makes it more challenging for SROs and the SEC to conduct cross-market supervision of trading activities and oversight of the securities markets and market participants.
Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Instead, each SRO uses its own separate audit trail system to track information relating to orders in its respective markets. And the existing audit trail requirements vary significantly among markets. That means that regulators, when conducting a cross-market analysis, must obtain and merge together a large volume of disparate data from different entities.
As such, there is a heightened need for a uniform, consolidated cross-market order and execution tracking system.
The Final Rule
The Commission adopted Rule 613 to create a comprehensive consolidated audit trail that would allow regulators to efficiently and accurately track all activity throughout the U.S. markets in certain securities known as National Market System (NMS) securities.
Among other things, the rule requires SROs to jointly submit a plan – called an NMS plan – to create, implement and maintain a consolidated audit trail. The rule specifies the type of data to be collected, when the data is to be transmitted, and how the data is to be prepared for regulatory use.
In particular, the rule mandates that the NMS plan:
- Requires each national securities exchange and FINRA as well as their respective members to provide certain detailed information to a newly created central repository regarding each quote and order in an NMS security – and each reportable event with respect to each quote and order, such as its origination, modification, cancellation, routing, and execution.
- Requires certain data to be reported to the central repository by 8 a.m. Eastern Time the following trading day – and be subsequently available in an aggregated format to regulators for their analysis.
- Requires all reportable events to be tagged and stored by the central repository in a linked fashion allowing regulators to accurately follow an order through its entire life cycle from generation through routing, modification, cancellation, or execution.
- Requires each broker dealer and national exchange to be assigned a unique, cross-market identifier to be reported to the central repository along with every reportable event.
- Requires each customer as well as any customer adviser who has trading discretion over a customer’s account to be assigned a unique, cross-market customer identifier to be reported to the central repository for every order originated.
- Requires SROs and their members to synchronize the business clocks they use to record the date and time of any reportable event, and require timestamps – reported for each event to the central repository – to be in millisecond or finer increments.
The rule allows the SROs to determine the specifics of how market participants would report data to the central repository. While this might allow for multiple electronic formats, the data must be reported in a way that enables the central repository to send it to regulators in a uniform electronic format.
It also allows small broker-dealers up to three years, rather than two years as proposed, from the effectiveness of the NMS plan to begin reporting the required data to the consolidated audit trail.
In addition, the final rule adds several new requirements regarding the process for developing and implementing the NMS plan. For example, the new rule mandates that the NMS plan:
- Describes not only the details and technological specifics of how the consolidated audit trail would be created, but also any reasonable alternative approaches considered by the SROs and the rationale behind their choices.
- Describes in detail the estimated costs for creating, implementing, and maintaining the consolidated audit trail, including a discussion of cost allocations among the SROs as well as a discussion of the costs to the members of the SROs (the broker-dealers) who would need to report their activities to the central repository.
- Discusses ways to eliminate any other reporting systems that are no longer necessary or that are superseded by the consolidated audit trail.
- Identifies how the sponsors of the plan solicited views of their members, provide a summary of those member views, and describe how the sponsors took those views into account.
- Requires the establishment of an Advisory Committee to advise the plan sponsors on how to implement, operate, and administer the central repository.
- Requires the central repository’s Chief Compliance Officer to regularly review the operations of the consolidated audit trail and, in light of market and technological developments, make appropriate recommendations to enhance the consolidated audit trail.
- Includes additional policies and procedures designed to protect confidential information collected and retained by the central repository.
- Provides detailed information regarding anticipated error rates as well as the plan’s proposed error correction process.
Once the SROs have submitted their proposed plan to the SEC, the Commission will publish the plan for notice and comment by the public. In considering the approval of the plan, the Commission will conduct an economic analysis of the consolidated audit trail based in part on the specific details and cost estimates required to be provided by the SROs, and further informed by any comments received from the public.
The rule becomes effective 60 days after the date of its publication in the Federal Register. Under the rule, the SROs are required to submit the NMS plan to the Commission within 270 days of the date of publication of the adopting release in the Federal Register. If and when the Commission approves the NMS plan, the SROs are required to report the required data to the central repository within one year after effectiveness of the NMS plan. Members of the SROs are required to report the required data to the central repository within two years after effectiveness of the NMS plans, with possible exceptions for members of the SROs that qualify as small broker-dealers.
Other Commission Actions on Market Structure
This action is part of a larger effort by the SEC to ensure that the markets are fair, transparent, and efficient.
Among other things the Commission already has undertaken:
- Large Trader Reporting System: Adopted a rule requiring large traders to identify themselves to the Commission and receive a unique identification number. Large traders are required to provide this number to their broker-dealers, who are required to maintain transaction records for each large trader and report this information to the Commission upon request.
- Sponsored Access: Adopted rules that would effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges and other alternative trading systems – and that would assure broker-dealers implement appropriate risk controls.
- Volatility Mechanisms: Approved a “limit up-limit down” mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band. Approved changes to the existing market-wide circuit breakers that, when triggered, halt trading in all exchange-listed securities throughout the U.S. markets. The limit up-limit down mechanism and the changes to the existing market-wide circuit breakers will be implemented on Feb. 4, 2013.
- Erroneous Trades: Approved new rules clarifying up front how and when erroneous trades would be broken.
- Stub Quotes: Approved new rules proposed by the SROs to strengthen the minimum quoting standards for market makers and effectively prohibit “stub quotes” in the U.S. equity markets.
The Commission also has sought public comment on a concept release about a wide range of topics concerning the equity markets to help facilitate the SEC’s ongoing review of market structure issues.